The race to take over Essar Steel entered the final phase with the submission of two bids on Monday, one by Numetal, a company in which VTB Bank has a majority and the Ruias are a minority partner, and the other by ArcelorMittal.

Potential bidders such as Tata Steel and Vedanta did not participate in the process.

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However, even as the bid details are yet to be made public, bankers are not sure if the two bids will pass eligibility muster.

They say the resolution professional (RP) and the National Company Law Tribunal (NCLT) will have to take a call on the eligibility of ArcelorMittal and Numetal because it involves interpreting the Insolvency and Bankruptcy Code (IBC) and relevant rules.

A senior executive of a public sector bank said the IBC was amended recently through an Ordinance to keep out defaulting companies and their promoters from participating in the auction for stressed assets.

So, what are the contentious issues being raised by bankers?

In the case of the Ruias, Essar Steel has defaulted on loan repayments, which led to the bankruptcy proceedings against the company.

The Ruias own a 10 per cent stake in Numetal through a trust, while VTB Bank of Russia owns a majority stake with two other partners.

An Essar executive, however, said that none of the promoters of Essar Steel had bid for the company.

“We are in a minority and have no management control over Numetal," the executive said.

Resolution professional Sumit Binani, however, said: “The spirit behind Section 29A of the IBC is to bar wilful defaulters whose dues had been classified as non-performing assets (NPAs) for more than a year and all related entities of these firms. It, however, allows defaulting promoters to be part of the debt resolution process if they repay dues in a month to make their loan accounts operational and the resolution happens within the timeframe specified in the code. Even if any such defaulting promoter has a minority stake in an SPV proposing a resolution plan or proposes to be in management of the corporate debtor during the implementation of the resolution plan, it is likely to fall under the barring provisions of Section 29A." On the other hand, according to a filing with the BSE, ArcelorMittal Netherlands BV held a 29.05 per cent stake in Uttam Galva Steel as foreign promoter at the end of December 2017.

The Miglani family and their companies held a 31.82 per cent stake in Uttam Galva, which has defaulted on repayments to lenders.

It is now a non-performing asset (NPA).

In a February 7 filing with the stock exchanges, however, Uttam Galva said the shareholding of ArcelorMittal Netherlands BV has been transferred to Sainath Trading Company Private Ltd by way of inter-se transfer. Consequently, the co-promotion agreement dated September 4, 2009, among certain shareholders has been terminated.

But, lenders said they would look at the promoter status at the time Uttam Galva turned into a NPA.

Earlier, domestic lenders, led by State Bank of India, had asked L N Mittal, billionaire-promoter of ArcelorMittal, to repay Rs 13.40 billion taken by KSS Petron Private Ltd, a 100 per cent subsidiary of KazStroyServices (KSS) of Kazakhstan, after KSS Petron defaulted on its loans in India and tuned into an NPA in 2015.

Mittal owns 33 per cent in KSS, an oil infrastructure provider company, in his personal capacity. Recently, when asked about the default by KSS Petron, ArcelorMittal had told Business Standard that legally ArcelorMittal could not be prevented from participating in the auction process. "ArcelorMittal has no connection with (KSS) Petron and does not believe this company has any relevance to the process. ArcelorMittal is a financially sound company with strong expertise in turnaround situations," it said in a statement. The statement did not talk about Mittal’s personal stake in the defaulting company, KSS Petron.

In this backdrop, lenders said the resolution professional and the NCLT would have to interpret the rules and take a call on the eligibility of the two bids. Some lenders, though, said the bidders should clear the dues first.

“The purpose of amendments to the IBC is to keep out defaulters. And if they want to be in the race, they must clear outstanding dues. This is the government directive and we cannot go against it," said the chief executive officer of a public sector bank.

On Monday, SBI Chairman Rajnish Kumar too said promoters must clear their dues so that they could become eligible to bid.

Soon after bidding for Essar Steel on Monday, ArcelorMittal said in a statement that its subsidiary, ArcelorMittal India (AMIPL), had submitted an offer for Essar Steel and laid down a revival plan for the company.

“Essar provides a compelling opportunity for ArcelorMittal to enter the high-growth Indian steel market," Mittal said in a statement. VTB Bank has offered to take over a large portion of the pending debt of Essar Steel, according to a source. As of March last year, Essar Steel’s dues to banks, including interest, were Rs 440 billion.